Monti Struggles against Bleak Outlook for Italian Economy

A Bleak Autumn for MontiThe Catastrophic State of Italy's Labor Market

The miner protest in Sardinia may have resulted in a stay of execution for a doomed coal production facility, but Italy's economy remains in freefall. The country is shedding jobs, production rates are abysmal and the infrastructure is appalling. Prime Minister Monti has vowed to turn things around. But how?

The images shocked the entire country. Over 1,200 feet (370 meters) below the ground, in front of television cameras and a dozen journalists, Stefano Meletti grabbed a knife and cut into his own arm. "It was a gesture of desperation," said Meletti's mining colleagues before bringing the 48-year-old family man up to the surface and taking him to the hospital.

The dramatic scene took place deep in the shafts of the Carbosulcis coal mine on the Italian island of Sardinia, where miners had staged an occupation. During their underground press conference, the miners said they were "prepared for anything." Their goal was to prevent the closure of the mine at the end of the year as planned and to save the jobs of 500 people. Only on Monday did they end their protest after the government in Rome agreed to continue subsidizing the mine for the time being. But, they said, they are determined to continue their fight should it become necessary.

Their resolve is not difficult to understand given the complete lack of other jobs available to them. Sardinia has an unemployment rate of 16 percent, with some 1,800 jobs are lost on average each month. Among Sardinians between the ages of 18 and 24, the jobless rate will soon rise above 40 percent.

Apart from a few regions in Italy's far north, the situation is similar across much of the rest of the country. Some 1.5 million jobs have disappeared in the last five years, with younger job seekers bearing much of the burden. Fully 35 percent of those under the age of 24 in Italy don't have work. And the trend remains negative.

Catastrophic Situation

Even those who have jobs aren't free of worry, given that short-term, limited contracts have long since become more numerous than traditional permanent positions. And full-time jobs are disappearing, with 400,000 of them having been axed since 2008. The part-time positions that have replaced them often don't pay enough to live on, particularly given that inflation in Italy stands at 3 percent and purchasing power is dropping by the month as a result.

Even the European Commission, long the staunchest proponent of strict austerity programs for seriously indebted countries such as Italy, has begun to worry about the catastrophic situation on the Italian labor market. Laszlo Andor, the European commissioner responsible for employment, warned recently of an "economic and social disaster" if Italy and other countries in Southern Europe don't find a solution to youth unemployment.

The political consequences could be grim as well. Across Europe, young voters are turning their backs on traditional centrist parties in favor of populist groups. Whether on the right or the left, whether in Greece or in the Netherlands, euro-skeptical parties are winning over the increasing numbers of people who have become disillusioned following years of crisis. In Italy, it is the well known comedian Beppe Grillo who has taken over the role of collecting support by way of vicious attacks on the EU. According to recent surveys, his Five Star Movement has good chances of becoming the second strongest party following general elections currently scheduled for next April.

Italy's economic misery becomes apparent from just a few indicators. Twenty years ago, the country's productivity was roughly 5 percent below that of its European partners. Today, it is 12 percent lower than the average EU level. Labor costs, however, have climbed more rapidly than average -- at a rate of over 3 percent each year. The result is that production in the country has become increasingly expensive. Luxury goods companies haven't suffered dramatically, but others have, with many going bankrupt.

Highest Priority

There are, however, many other significant problems. Bureaucracy in the country is infamous, a problem which often inhibits investment. The legal situation is atrocious, with courts taking years, sometimes even decades, to reach a verdict. Italy's infrastructure is likewise in a sorry state. And recent austerity measures, which have included significant tax hikes, mean that the tax burden can be as high as 45 percent. Foreign investment, not surprisingly, has suffered.

Now that the situation on the financial markets would appear to have calmed temporarily -- with yields on 10-year government bonds having dropped below 6 percent -- Italian Prime Minister Mario Monti has declared improving the country's economy to be his highest priority. He recently held a nine-hour cabinet meeting focused on coming up with ideas for stimulating growth and increasing productivity and competitiveness. He also intends to sound out Brussels on Sept. 6 for possible support from EU funds and to negotiate a "pact for productivity" with employers and labor unions in the country. Coming days will see him meeting separately with the two sides as a first step toward joint negotiations.

Just how productive such talks might ultimately be remains to be seen, given how far apart the two sides are. Employers would like to see further liberalization of the labor market in addition to tax cuts and massive investment in the country's infrastructure. Unions, however, are radically opposed to labor market reform -- and the Italian budget would seem to have little room for infrastructure improvements.

Many in Italy are now under the impression that the country's problems are to be solved entirely at the expense of ordinary people. Reforms instituted by the Monti administration have meant higher taxes, greater healthcare contributions, an increase in the retirement age and reduced purchasing power.

Continuing Job Losses

Labor unions too have been calling for lower taxes, but for workers rather than for companies, particularly for low-wage earners. They are also demanding that the government focus on protecting endangered jobs and creating new ones. Otherwise, they have threatened to launch a wave of protest. Indeed, the first general strike of public servants has already been scheduled for Sept. 28.

But reversing the negative trend on the labor market will not be easy for Monti. His government is concerned first and foremost with increasing productivity and thereby improving his country's competitiveness. In the long term, it is the right focus. But in the short term, that means that the same amount of goods and services must be produced by fewer people. In the absence of growth, increased productivity necessarily means job losses.

Growth, however, is not currently in the cards for Italy. On the contrary, whereas the government in Rome originally projected that the economy would contract by 1.2 percent this year, the country's central bank, the Banca d'Italia, now forecasts a 2 percent drop. Next year is also likely to be in the red. Job losses are likely to continue.

It will be a difficult autumn, says Labor Minister Elsa Fornero. An economics professor by trade, Fornero is not normally known for exaggeration.